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What Are ETF Expense Ratios and Why Do They Matter?

  • Expense ratios are typically expressed as a percentage of a fund’s average net assets and can include various operational costs and annual fees.
  • The operating expenses of an ETF directly impact the value of your investment.
  • The average expense ratio for index ETFs is typically lower than that of index mutual funds.
4 min read

When choosing from the thousands of US-listed exchange traded funds (ETFs), cost is a central focus. And it should be: High costs erode portfolio returns.

As investors and financial advisors seek to identify funds that are well suited to meet portfolio objectives, minimizing costs is an important part of the investment decision process — and expense ratios play a critical role.

What Is an ETF Expense Ratio?

The expense ratio of an exchange traded fund reflects how much it costs to operate an ETF.

How Do Expense Ratios Work?

The expense ratio is typically expressed as a percentage of a fund’s average net assets and can include various operational costs and annual fees, such as:

  • Administrative fees 
  • Compliance fees
  • Management fees
  • Marketing fees
  • Record-keeping fees
  • Auditing fees
  • Legal fees
  • Shareholder service fees

These operational expenses impact the fund’s net asset value (NAV). The NAV of an ETF represents the per-share value of the fund's assets less any liabilities, such as operating expenses.

The expense ratio doesn’t include brokerage commissions, transaction fees, and other fees to financial intermediaries that you may pay for purchases and sales of ETF shares on the secondary markets.

The gross expense ratio is the fund’s total annual operating expense ratio, gross of any fee waivers or expense reimbursements. The net expense ratio represents the ETF’s expenses after any expenses were waived and/or partially absorbed by the fund manager.

Evaluating ETF Expense Ratios: An Example

If you invest $10,000 in an ETF with an expense ratio of 0.0945%, you’ll pay $9.45 to the fund’s manager this year. As the value of your investment grows, the amount you pay will also grow — which is why a fund’s expense ratio can significantly impact your returns over time.

Note that expense ratios — which are impacted by many factors, including fund objectives and total assets — vary across the array of available ETFs:

  • ETFs that invest in foreign securities generally cost more to manage than funds that invest in US Treasury bonds.
  • As an ETF’s assets increase, its fixed costs likely represent a smaller percentage of its net assets, meaning its expense ratio often decreases.
  • Actively managed ETFs tend to have higher expense ratios than passive, index-tracking funds.

The Average ETF Expense Ratio Is Lower Than Mutual Funds

The average expense ratio for index ETFs is typically lower than that of index mutual funds, historically 0.57% for ETFs versus 0.84% for mutual funds.1 Importantly, the higher costs of mutual funds can add up and impact portfolio returns over the long run.

Fortunately for investors, ETFs’ average expense ratios has been falling for many years. From 2009 to 2022, average index equity ETF expense ratios declined by 53% and average index bond ETF expense ratios fell by 56%. In 2022, the average expense ratio for index equity ETFs declined 1 basis point to 0.16%. The average expense ratio for index bond ETFs declined 1 basis point to 0.11% in 2022.2

Where Do You Find an ETF’s Expense Ratio?

Many fund company websites and online brokerage platforms offer ETF screener tools to help you sort or filter according to expense ratio. If you’re researching a specific ETF, the expense ratio can be found in a fund’s prospectus or fact sheet.

Mind the Total Cost of Ownership

When considering the cost of an ETF, expense ratio analysis is an important part of the process — but it’s also crucial to evaluate an ETF’s total cost of ownership (TCO), which includes trading and holding costs. Depending on your rebalancing size and frequency, trading costs can accumulate significantly and have a larger impact on TCO than any expense ratio difference between two ETFs.

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